Navigating Singapore 2019 - Healthcare Sector & Others ~ UNDERWEIGHT

Positive trends

Domestic healthcare demand relatively resilient.

Healthcare companies in Singapore are generally getting more support from their local patient pool, except for Q&M Dental Group (SGX:QC7) which saw slower dental demand on the back of tighter requirements for Community Health Assist Scheme (CHAS) claims.

For Raffles Medical Group (SGX:BSL), 3Q18 topline was flattish at +1.2% y-o-y, mainly because of the new government screening contract and addition of corporate clients, but foreign patient demand was lower.

Overseas expansion gaining traction.

Limited growth opportunities in their home markets have motivated several healthcare players to venture overseas. Prior to their upcoming hospital opening in Chongqing and Shanghai, Raffles Medical Group entered into an MOU with China Taikang Insurance to explore the cross-selling of insurance products and potential collaboration on healthcare-related services.

IHH Healthcare (SGX:Q0F) has enlarged its footprint in India with the Fortis acquisition, and Health Management International bought a majority stake in StarMed Specialist Centre in Singapore. These could prove to be strong engines for earnings growth if executed well, in our view.

Meanwhile, in the near-term, we are likely to see companies manage their lacklustre topline growth through tighter cost management.

Negative trends

Increasing competition everywhere.

There was no sign of easing competitive pressure in 3Q18 for healthcare companies, in terms of both patient volume and manpower (doctors and support staff). Apart from price-sensitive patients possibly trading down to public hospitals, Talkmed (SGX:5G3) is also facing pressure from more price competitive healthcare providers in neighbouring countries. Health Management International also sees potential competition from KPJ Bandar Dato Onn and Columbia Asia South Key when they open in Johor in 2019. To tackle the challenges of hiring dentists, Q&M Dental Group has moved towards offering scholarships to promising talent.

Unfortunately, FX is also a major headwind.

Movement in the rupiah vs. the Singapore dollar has always been a cause for concern for domestic healthcare players, as lower affordability has led to softer medical tourism. IHH Healthcare was a major victim of the depreciating lira against the US$, as finance costs increased and eroded the profitability of Acibadem, causing the share price to take a hit.

Looking to 2019

Earnings pressure to surface.

While 2018 is likely to be a year of unexciting growth for healthcare, share prices have stayed relatively defensive. Going into 2019, we think earnings pressure for hospital operators like Raffles Medical Group and Health Management International could start showing up as they grapple with opening expenses for new hospitals.

Risks include unfavourable FX and increasing regulatory scrutiny; catalysts are faster-than-expected EBITDA breakdown from new hospital openings and recovery of medical tourism.

SPH (SGX:T39) is another stock that has outperformed the STI Index for 2018 YTD, as diversification into overseas purpose-built student accommodation (PBSA) and divestment gains helped to mitigate the negative impact of dividend cuts and structural media decline. We think investors are likely to focus on the following three areas in 2019:

In contrast, Singapore Post (SGX:S08) underperformed relative to the market in 2018 due to longer-than-expected e-commerce turnaround and industry headwinds (terminal dues changes, rising competition). We think the three main things to look out for in 2019 are:

sustainability of growth in the post and parcel segment,

execution of US e-commerce and

possible monetisation of its property assets.

Stock preference

While FX and increasing competition could pose some downside risks, Health Management International has managed its EBITDA loss from the new StarMed opening relatively well, in our view. As management intensifies its community outreach efforts to gain better awareness, we believe improving patient volume and faster ramp-up could re-rate the stock.

For IHH Healthcare, we think the share price correction of more than 15% YTD has priced in the impact of lira depreciation, but execution on Fortis turnaround and Chengdu hospital opening could be key next.

Raffles Medical Group (Rating: HOLD, Target Price: S$1.19) also appears to be more fairly valued at the current level, though we prefer to await visibility on the extent of start-up losses in the coming quarters.

We are neutral on both SPH (Rating: HOLD, Target Price: S$2.74) and Singapore Post (Rating: HOLD, Target Price: S$1.12) as they continue on their transformational path, with dividend yields of c.5% and c.4%, respectively, as near-term support.

Our HOLD rating for SPH is underpinned by a slower decline in media earnings. Upside risks could come from further PBSA acquisitions, while weaker-than-expected take-up rate for Woodleigh Residences could pose downside risks.

Singapore Post is also a HOLD for us, premised on the challenging outlook for its logistics and e-commerce operating environment. But such risks could already be in the price post recent correction, at 18x FY20F P/E below its historical mean; we would turn more positive on the stock if a turnaround is clearer in sight.

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